Question

Bdj co. wants to issue new 19-year bonds for some much-needed expansion projects. the company currently has 8.8 percent coupon bonds on the market that sell for $1,128, make semiannual payments, have a $1,000 par value, and mature in 19 years. what coupon rate should the company set on its new bonds if it wants them to sell at par?

Answer 1

Answer:

7.75%

Explanation:

We are given the present and future value of the bonds, the payments, and the number of payments, but we must determine the discount rate. Since I like to use excel, I will prepare a payment a series of cash flows to determine the internal rate of return:

• initial cash flow = -1,128
• 37 cash flows = 88
• 38th cash flow = 1,088

using the IRR function:

=IRR(-1128,88 ... 37 times,1088) = 7.75%

In order for Bdj Co. to be able to sell their bonds at par value, they should offer a 7.75% coupon rate.